Real Tips For Building Credit
Credit seems to be the thing on everyone’s mind when we speak with members. And for many, they are just starting out and need to build credit, or perhaps have had some challenges and need to re-build. Today’s tips are geared primarily to those needed to build, but many can be applied to re-build as well.
So, how can we help teenagers and young adults build a strong financial foundation in the form of building credit? Your credit score is a key factor in many financial decisions, including getting approved for loans and credit cards or renting an apartment or sometimes even getting a job. And of course, a good credit score can save you money when you are able to qualify for lower interest rates and better terms on loans.
So, what should they do?
First, let’s talk about credit builder loans. Just like it sounds, this is a loan designed specifically to help people build credit or improve their credit score.
Here’s a quick breakdown of how it would work:
Apply for the Loan: You will go to your credit union or bank and apply. They will most likely approve you based more on your ability to repay, than your credit score. They may consider things like your income or if you have money in a savings account.
Make Payments: You will then pay the loan back, with whatever interest owed for the term of the loan. The terms may vary depending on the financial institution you use. Note: Often, credit unions or banks have a set interest rate on all credit builder type loans.
Build Credit History: Each payment is reported to the credit bureaus, helping to build your credit history and improve your credit score.
Easy right? You would think so, but there are often challenges with really maximizing these loans.
1. On time payments – The biggest percentage of a credit score is payment history, or paying on time. With credit builder loans the monthly payment is generally going to be low by design so that its hopefully easy for the borrower to make those payments. But many people are late or miss payments. Building credit goes hand in hand with building good habits and a big one is making sure you make your payments on time. Otherwise, the loan won’t help your score. Using a service like bill pay or even a simple reminder in your phone can help you remember to pay on time.
2. Start before you need it – credit builder is kind of in the name right? It takes time to build credit. Credit reports are showing history and how you handle your finances. So you don’t want to wait until you need something like a car to try and build credit. In fact, it can take up to 6 months for the credit bureaus to start reporting your activity. Start before you need it.
3. Start at 18 – this really goes with number 2. You must be 18 years of age to enter a legal contract. We recommend, if you have a child, help them start with something like a credit builder at 18. Then by the time they need to make a big purchase that requires a loan, they will have helped establish a good score.
4. Don’t just pay it off! Often people look at the loan and think since it’s such a small amount, they will just pay it off, but is a bit counter-productive and would only report that you don’t need credit. The loan is designed to establish a credit pattern.
5. Finish the program – this goes with number 4. Credit builder loan programs will vary depending on your financial institution. Often, we see people complete part of the plan, but they don’t finish it. Again, this can affect the reporting of a pattern or history.
6. Use it for the right reasons - A credit builder should do just that. It is designed to build your credit history/score, but often people are using them like an emergency or personal loan.
Your habits and how you handle credit is what is truly what this is all about. Utilizing these methods or suggestions will help you demonstrate responsibility with your credit.
Here are a few other ways to build credit:
1. A secured loan or Credit Card:
With a shared secured loan or credit card funds are deposited into a savings account that secures the credit or loan. It basically acts as collateral.
As you pay the loan off, the money in the savings account is “released” for use. Although, there are some financial institutions that will hold the money until you pay the loan in full.
2. Become an Authorized User: Parents will often add their child as an authorized user on their credit card account. This can help your child build credit based on the parents credit history, but sometimes not as much as you would think. Some cards report to the credit agencies for a minor, some don’t, so the credit may not be reported until your child is 18. And just like all credit, if the account has any issues or is used unfavorably, it can affect the child’s credit. Keep these things in mind and be sure to read the fine print.
3. Pay All Bills on Time: We say it all the time! Pay your bills on time! This goes for all bills including your phone and utility bills as any of these and more can indirectly affect your credit if you later apply for a loan or credit card and that payment history is not in good standing.
Keep your Balances Low: If you use credit cards, keep your balances low compared to your credit limit. This shows lenders you can manage credit responsibly.
Co-borrower: You can also consider a co-signer or borrower on a loan to help build credit. Keep in mind however, this is a big responsibility to the co-borrower. If for any reason you are unable to repay the loan, then the co-borrow is responsible for the loan. You want to make sure this person understands this. Someone who has credit in good standing is important as well, not only to get approved but to get favorable rates and terms.
As you can see, there are several ways to build your credit. Building credit can take time and patience, but it’s well worth the effort. It’s best to start with small, manageable steps, and over time, you’ll build a strong credit history. Remember, the goal is to show lenders that you can handle credit responsibly.
BONUS:
Consider a Student Credit Card. Many credit unions or banks offer credit cards specifically designed for students. Often these cards have lower credit limits and they may even offer rewards for things like good grades. Using a student credit card responsibly can help you build credit while you’re still in school. We recommend paying off the balance in full each month though if possible to help avoid interest charges and also avoid accumulating debt. Which is another good habit to establish when dealing with credit cards.